Tijuana Bronze Machining: Teaching Commentary

Topics: Management accounting, Costs, Cost accounting Pages: 12 (1783 words) Published: April 16, 2006
OVERVIEW

This is a basic case in Activity-Based Costing (ABC) and Activity-Based Management (ABM). There is enough richness to the fact-situation to create a non-trivial calculational challenge for students without taking the case beyond an "introductory" level. Also, the business context for the calculations is rich enough to support good discussion on the managerial implications.

I use Tijuana Bronze as the introductory case on ABC/ABM in the required managerial accounting course at Tuck and at Babson. The eight assignment questions force students to address the ABC calculations and the ABM managerial implications. Answers to the assigned questions are shown below.

Question 1. Product Costs per Unit - Current System

Valves

Pumps Flow

Controllers

Material $16.00 $20.00 $22.00

Direct Labor 4.00 8.00 6.40

Overhead 17.56 35.12 28.10

(439% of Direct Labor $)

Standard unit cost $37.56 $63.12 $56.50

*Overhead

Machine depreciation $270,000

Set-up labor 2,688

Receiving 20,000

Materials handling 200,000

Engineering 100,000

Packing and shipping 60,000

Maintenance 30,000

Total overhead $682,688

Total run labor = 9,725 hours x $16 = $155,600

Overhead rate = 682,688 / 155,600 = 439%

Question 2. Estimated "Contribution Margin" for Products

Valves

Pumps Flow

Controllers

Revenue $57.78 $81.26 $97.07

Variable Costs--Material only 16.00 20.00 22.00

Contribution 41.78 61.26 75.07

or

Assume Labor is Variable (case says only direct material is short-run variable).

Run Labor 4.00 8.00 6.40

Set-up Labor ~.02 ~.05 ~.48

4.02 8.05 6.88

Contribution $37.76 $53.21 $68.19

Question 3. Revised Product Unit costs per "More Modern View"

Valves

Pumps Flow

Controllers

Material $16.00 $20.00 $22.00

Material Related Overhead

(48%)

7.68

9.60

10.56

Set-up Labor .02 .05 .48

Direct Labor 4.00 8.00 6.40

Other Overhead

($42.59 per machine hr)* 21.30 21.30 8.52

Revised standard cost $49.00 $58.95 $47.96

*Material Related Overhead

Receiving $ 20,000

Material Handling 200,000

Total $220,000

Overhead Allocation Rate on Materials Cost:

$220,000 / $458,000 = 48% of materials cost

**Other Overhead on Machine-Hour Basis

Machines Depreciation $270,000

Engineering 100,000

Packing and Shipping 60,000

Maintenance 30,000

Total $460,000

Overhead Allocation Rate = $460,000 / 10,800 hours =

$42.59 per machine hour

Question 4. Products Costs Using "Activity Based Costing"

Valves Pumps Flow Controllers

Total Month

Per Unit Total 7,500 Per Unit Total 12,500 Per Unit Total 4,000 24,000 units

Material $16.00 $120,000. $20.00 $250,000. $22.00 $88,000. $458,000.

Labor 4.00 30,000. 8.00 100,000. 6.40 25,600. 155,600.

Overhead: .

Set-up 0.02 128. 0.05 640. 0.48 1,920. 2,688.

Receiving 0.08 600. 0.30 3,800. 3.90 15,600. 20,000.

Mat'l. Handling 0.80 6,000. 3.04 38,000. 39.00 156,000. 200,000.

Pack & Ship 0.32 2,400. 1.11 13,800. 10.95 43,800. 60,000.

Engineering 2.66 20,000. 2.40 30,000. 12.50 50,000. 100,000.

Maintenance 1.40 10,500. 1.39 17,400. 0.53 2,100. 30,000.

Mach. Depr. 12.50 93,750. 12.50 156,250. 5.00 20,000. 270,000.

Total Overhead $17.78 $133,378. $20.79 $259,890. $72.36 $289,420. $682,688.

Total Cost $37.78 $283,378. $48.79 $609,890. $100.76 $403,020. $1,296,288.

Question 5. Comparisons of Reported Income Between the Two Methods

There will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.

Question 6. Comparison of Product Profitability Under Three Costing Systems

Valves

Pumps Flow

Controllers

Actual Selling Price $57.78 $81.26 $97.07

Standard Cost 37.56 63.12 56.50

Gross Margin 20.22 18.14 40.57

Gross Margin % 35% 22% 42%

Revised Cost 49.00 58.95 47.96

Gross Margin 8.78 22.31 49.11...
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